Rev. Rul. 57-372

Advice has been requested whether an employees' stock bonus plan will qualify under section 401(a) of the Internal Revenue Code of 1954 for exemption from tax under section 501(a) of the Code, where the trust assets of the plan are stock of the employer corporation, which stock under state law must be held in escrow by the state commissioner of corporations.

A newly formed corporation established a stock bonus plan and trust for the benefit of its employees. Under the state corporate securities act, the commissioner of corporations of the state is required to hold in escrow all securities, such as in the instant case, where the corporation is relatively new and does not have a long proven earning record. The main purpose of the escrow is the protection of the public by requiring a purchaser of stock to sign a statement that he is familiar with the stock being purchased. Upon the receipt of such a signed statement, all transfers are approved unless there is evidence of fraud, bankruptcy, or dishonesty. Pursuant to the provisions of the state statute, the stock of the employer corporation contributed by the employer to the trust is placed in escrow. Under these circustances, a participant in the stock bonus plan, or his beneficiary, does not receive the actual shares in the event of a distribution of trust assets but, instead, receives a certificate of ownership.

Section 1.401-1(b)(1)(iii) of the Income Tax Regulations states that a stock bonus plan is a plan established and maintained by an employer to provide benefits similar to those of a profit-sharing plan, except that the contributions by the employer are not necessarily dependent upon profits and the benefits are distributable in stock of the employer company. For the purpose of allocating and distributing the stock of the employer which is to be shared among his employees or their beneficiaries, such a plan is subject to the same requirements as a profit-sharing plan.

In this respect, the regulations state that a profit-sharing plan must provide a definite predetermined formula for allocation the contributions made to the plan among the participants. Also, it is the established policy of the Internal Revenue Service to require unrestricted marketability with respect to stock or securities of the employer corporation contributed to an employees' trust. It is the position of the Service that the escrow requirement in the instant case imposes no restriction upon the marketability of the stock contributed to the trust.

Accordingly, it is held that an employees' stock bonus plan may qualify under section 401(a) of the Internal Revenue Code of 1954 for exemption from tax under section 501(a) of the Code notwithstanding that the trust assets of the plan are stock of the employer corporation which under the applicable state law must be held in escrow by the state commissioner of corporations because the corporation is relatively new and does not have a proven earning record. However, the transfer of the stock to the trustee must be authorized by the state commissioner of corporations and the District Director of Internal Revenue must be satisfied that the value placed upon the stock is the fair market value and the income therefrom is a fair return.